State & Local Finance Initiative

Revenue and Taxation:

State and local taxes play important roles in assisting low- and moderate-income families, attracting business development, and stabilizing negative effects of economic downturns. Serving as a laboratory for different approaches to resolving tax and fiscal issues, all of the state and local governments have different approaches to collecting the revenue necessary to fund services. The mix of taxes varies significantly across states, depending on their economic activities, physical characteristics, and policy choices. In addition to financing public services, state and local governments also use their tax systems as a tool of social and economic policy. Governments might create special incentives to attract businesses, for example. And like the federal government, states often give tax preferences for targeted activities such as education, military service or business expansion or relocation. Local governments have preferences relating to property tax forgiveness or special assessment districts. 

Spotlight

Reforming State Gas Taxes: How States Are (and Are Not) Addressing an Eroding Tax Base

The federal government and most states have per-unit gas taxes. Because they tax gallons purchased, and not a percentage of purchase price, revenues are falling across the country as Americans buy less gas. If states do not want to cut transportation projects they now have to increase tax rates or find new revenue sources. This brief examines the national trends affecting gas tax revenues and describes what different states are doing (or not doing) in response to an eroding tax base.

Gas Tax Rate with Inflation

 

Temporary Taxes: States' Response to the Great Recession

When the Great Recession created unexpected budget deficits, many states used temporary tax increases to maintain revenues for vital government services. There is a perception that temporary taxes become permanent taxes but the evidence on this point is mixed. In this brief, we look at 14 states and the District of Columbia that together enacted 25 temporary tax increase measures between 2008 and 2011.


 

Featured Publication

State Policy and EITC Expansion for Childless Workers (Article/Tax Facts)
Elaine Maag and Brian David Moore

Residential Property Taxes in the United States (Research Report)
Benjamin H. Harris and Brian David Moore

Business Franchise Taxes in the District of Columbia (Research Report)
Norton Francis

State and Local Tax Deductions (Article/Tax Facts)
Yuri Shadunsky

Back from the Dead: State Estate Taxes After the Fiscal Cliff (Research Report)
Norton Francis

What Federal Tax Reform Means for State and Local Tax and Fiscal Policies(Testimony)
Kim Rueben

State Tax Systems Can Be Important Part of Safety Net (Article/Tax Facts)
Elaine Maag

 
Publications for Revenue and Taxation

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The Effects of the Medicaid Expansion on State Budgets: An Early Look in Select States (Research Report)
Stan DornNorton FrancisLaura SnyderRobin Rudowitz

This study analyzes the state budgetary effects of Medicaid expansion in Connecticut, New Mexico, and Washington State. Researchers interviewed state budget staff and officials and reviewed state budget documents. Early evidence shows state savings, within and outside Medicaid, and revenue gains alongside limited costs resulting from expansion. Researchers also analyze findings from Kentucky, another expansion state, noting that the two states able to compare overall costs and savings (Kentucky and Washington) both found that expansion yielded net state budget gains. This includes projections for future years when states pay 10 percent of Medicaid expansion costs.

Published: 03/19/15
Availability: HTML


Federal Tax Policy Uncertainty and State Revenue Estimates (Research Brief)
Norton FrancisSarah Gault

April is the most important month of the year for individuals who owe federal and state income taxes and for governments that rely on income taxes as a major source of revenue. Because personal income tax receipts account for about 45 percent of federal government receipts and more than 33 percent of state tax revenue, what happens in April has a major impact on these governments’ fiscal positions and their ability to provide services through the end of the year. While the final payments are always a surprise, the past two Aprils produced even larger surprises than usual. A confluence of events in 2012 compounded the normal uncertainty in 2013 and 2014. This brief examines how timing of events like the fiscal cliff affects state budget outlooks and how state economists grapple with uncertain federal policy affecting income tax revenue.

Published: 03/02/15
Availability:   PDF


State Economic Monitor: January 2015 (Series/State Economic Monitor)
Richard C. Auxier

The State & Local Finance Initiative’s State Economic Monitor tracks economic-performance data across the states and the District of Columbia, highlighting differences in key indicators including employment, wages, housing, and taxes. This quarter’s report finds the unemployment rate fell in 46 states and DC between December 2013 and December 2014, but national real average weekly earnings only increased in 16 states. Total tax revenue over the past four quarters was 1.6 percent higher than the previous year.

Published: 01/29/15
Availability:   PDF


A Work Tax Credit That Supports Puerto Rico's Working Families (Research Report)
Maria E. Enchautegui

Puerto Rico eliminated its work tax credit (WC) in 2014. The credit, which was established in 2006, delivered benefits to 45 percent of all tax filers in 2013 at a total cost $124 million. The maximum credit was $450. This report assess the experience with the WC from 2007 to 2013 and suggests elements for a possible redesign that rewards and stimulates work, reduces hardship, strengthens the tax base, and offsets regressivity in ways that are consistent with current tax reform proposals in Puerto Rico.

Published: 12/12/14
Availability:   PDF


Can California Teacher Pensions Be Distributed More Fairly? (Research Report)
Richard W. JohnsonBenjamin G. Southgate

The California State Teachers’ Retirement System has been grossly underfunded for the past decade. State policymakers have responded by cutting plan benefits for new hires and raising teachers’ required plan contributions. These changes, however, have undermined teachers’ retirement income security. Only 35 percent of new hires will receive pensions worth more than the value of their required plan contributions. Most new hires would have better financial outcomes if they could opt out of the mandatory retirement plan and invest their contributions elsewhere. Additional plan reforms should focus on changing the benefit formula to distribute pensions more equitably across the workforce.

Published: 12/05/14
Availability:   PDF


Angel Investor Tax Credits (Article/Tax Facts)
Norton Francis

High net worth investors can reduce the cost of an investment in 29 states by claiming an "angel investor" tax credit. In most states, the credit is worth more than 25 percent of the investments and can be transferred to another taxpayer if it exceeds the investor's liability. States hope the credit will develop high tech clusters and generate economic activity.

Published: 11/25/14
Availability:   PDF


Reforming State Gas Taxes: How States Are (and Are Not) Addressing an Eroding Tax Base (Research Brief)
Richard C. Auxier

The federal government and most states have per-unit gas taxes. Because they tax gallons purchased, and not a percentage of purchase price, revenues are falling across the country as Americans buy less gas. If states do not want to cut transportation projects they now have to increase tax rates or find new revenue sources. This brief examines the national trends affecting gas tax revenues and describes what different states are doing (or not doing) in response to an eroding tax base.

Published: 11/06/14
Availability:   PDF


Temporary Taxes: States' Response to the Great Recession (Research Brief)
Norton FrancisBrian David Moore

When the Great Recession created unexpected budget deficits, many states used temporary tax increases to maintain revenues for vital government services. Because they are generally less disruptive than immediate spending cuts, temporary tax increases can be a useful tool for overcoming short-term deficits. There is a perception that temporary taxes become permanent taxes but the evidence on this point is mixed. States do allow temporary taxes to expire after the taxes have met their short-term revenue needs but some of the taxes are made permanent or extended. In this brief, we look at 14 states and the District of Columbia (DC) that together enacted 25 temporary tax increase measures between 2008 and 2011.

Published: 11/05/14
Availability:   PDF


Municipal Debt: What Does It Buy and Who Benefits? (Research Report)
Harvey GalperKim RuebenRichard C. AuxierAmanda Eng

This paper examines the incidence of the federal income tax exemption of interest on state and local bonds, applying a fixed-savings, simplified general equilibrium approach to estimate incidence effects on both the sources and uses of income. In contrast to traditional empirical work that allocates the benefit of tax exemption only to current holders of tax-exempt bonds based on current interest rates, we incorporate the fact that the existence of tax exemption causes the taxable interest rate to rise and the tax-exempt rate to fall. As a consequence, on the sources side, tax exemption can increase after-tax income for holders of both taxable and taxexempt bonds. On the uses side, consumers of both private and public goods are affected by the higher cost of funds to private and federal government borrowers, the lower cost of funds to state and local borrowers, and the lower cost of funds to private-sector entities with access to the proceeds of tax-exempt borrowing. Overall, higher income individuals remain the primary beneficiaries of tax exemption on the sources side with this new approach, but less so than under the traditional approach. On the uses side, households who consume a relatively large share of state and local public services, such as those with several school-age children, receive significant net benefits.

Published: 10/29/14
Availability: HTML | PDF


Assessing Pension Benefits Paid under Pennsylvania's State Employees' Retirement System (Research Report)
Richard W. JohnsonBarbara ButricaOwen HaagaBenjamin G. Southgate

Pennsylvania’s pension plan for state employees receives a failing grade in the Urban Institute’s state and local pension plan report card, and ranks as the third-worst plan in the nation covering newly hired general state employees. The plan scores poorly because it is inadequately funded, it penalizes work at older ages by reducing lifetime benefits for older employees, and it provides few retirement benefits to short-term employees. Age-25 hires must work 32 years before they accumulate rights to future pension benefits worth more than their required plan contributions. Various pension reforms could distribute benefits more equitably across the workforce.

Published: 09/04/14
Availability:   PDF

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